Death valley curve definition

What is the Death Valley Curve?

The Death Valley curve is the period between when a startup company receives funding and when it begins to generate positive cash flow. During this period, because of the lack of cash flow, it is quite unlikely that the firm can obtain any additional funding, and so is at maximum risk of failure. During this time, the firm’s business model has not yet been proven, so investors are unwilling to put any more money into its operations.

The term describes an actual downward curve in the remaining cash balance, where substantial initial startup costs are incurred, thereby sharply dropping the amount of cash on hand. Examples of these startup costs are legal fees, research and development, and customer acquisition expenses. An investor needs to closely monitor and provide advice to a startup during this period, in order to increase the probability of gaining any return on investment.

How to Extend the Death Valley Curve

It is essential for the management team of an startup company to understand how the Death Valley curve can be extended. This means paring back on your cash usage, so that your initial funding is sufficient to see the business through to initial profitability. Here are several ways to do so:

  • Trade company stock for salaries. Some employees may be willing to forego a portion of their salaries for company stock, especially if they see a strong upside potential for the business.

  • Outsource work. When you have a choice of hiring full-time staff or outsourcing work to contractors, consider the second option. Doing so reduces your fixed costs.

  • Minimize rent. It rarely makes sense to enter into an expensive lease for fancy offices. Instead, lower your expectations for office space. Better yet, encourage employees to work from home in order to avoid renting office space entirely.

Related AccountingTools Courses

Corporate Finance

Entrepreneur’s Guidebook